Question

Alakazam Corp. began business on January 1, 2016. At December 31, 2016, it had a $4,500 balance in the Deferred Tax Liability account that pertains to property, plant, and equipment acquired during 2016 at a cost of $900,000. The property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting purposes, and is a Class 8—20% asset for tax purposes. Alakazam’s income before income tax for 2017 was $60,000. Alakazam Corp. follows IFRS and the half-year convention for depreciation.

The following items caused the only differences between accounting income before income tax and taxable income in 2017.

In 2017, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2017. The other $37,500 will be expensed equally over the 2018 and 2019 accounting periods. The full $56,250 was deducted for tax purposes in 2017.

Alakazam pays $9,000 a year for a membership in a local golf club for the company’s president.

Alakazam now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2017 were $9,000. Cash payments in 2017 for warranty repairs were $4,500.

Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2017.

The maximum allowable CCA was taken in 2017. There were no asset disposals for 2017. Income tax rates have not changed since the company began operations.

Required:

1. Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.

2. Calculate income tax payable for 2017.

3. Prepare the journal entries to record income taxes for 2017.

4. Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income tax.”

5. Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.

6. How would your response to parts (a) to (e) change if Alakazam reported under ASPE?

Answer 1

1. Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.

Statement of Financial Position Account Dec 31, 2017	Tax Base	Carrying Amount	Deductible(Taxable) Temporary Differences	Tax Rate	Deferred Tax Asset(Liability)	For(f)ASPE Curr. or LT
Plant Property & Equipment	$648,000	$675,000	(27,000)	30%	8,100	LT
Prepaid rent (2018 expenses)	-	18,750	(18,750)	30%	(5,625)	C
Prepaid rent (2019 expenses)	-	18,750	(18,750)	30%	(5,625)	LT
Warranty liability	-	(4,500)	4,500	30%	1,350	C
Deferred Tax Liability Dec 31, 2017					(18,000)	LT
Deferred Tax Liability Before Adjustment					(4,500)	C
Incr. in deferred tax liability and deferred tax expenses for 2017					(13,500)

Tax base for 2016 (CCA half year rule i.e., 10%) = $900,000-10% = $810,000
Tax base for 2017 = $810,000-20% = $648,000
Carrying Amount = 900,000-75,000-150,000 = 675,000

2. Calculate income tax payable for 2017.

Accounting income		$60,000
Add: Permanent differences
50% of meals expense ($12,000 X 50%)		6,000
Golf club fees		9,000
Less: Reversing differences:
Capital cost allowance Add: Depreciation	(162,000) 150,000	(12,000)
Rent paid Add: Rent expenses	(56,250) 18,750	(37,500)
Warranty Payments Less: expenses	(4,500) 9,000	4,500
Taxable income		30,000
Tax rate at 30%		9,000

3. Prepare the journal entries to record income taxes for 2017.
Current Tax Expense       9,000
           Income Tax Payable    9,000
Deferred Tax Expense    13,500
                 Deferred Tax Liability     13,500
(12,000+37,500-4500) * 30%

4. Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income tax.”
Net income = Income before income tax - current year income tax - deferred income tax
= $60,000- 9,000-13,500 = 37,500

5. Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.
Statement of financial position, December 31, 2017
Non-current liabilities:
Deferred tax liability ($13,725 + $4,275) $18,000
Calculation:
Current liabilities:
Future tax liability= $5,625 - $1,350= $ 4,275
Non-current liabilities:
Future tax liability=$5,625 + $8,100= 13,725

6. How would your response to parts (a) to (e) change if Alakazam reported under ASPE?

Statement of financial position, December 31, 2017
Current liabilities: $ 4,275
Non-current liabilities: 13,725